Thursday, November 3, 2016

Egypt liberalizes FX market, raises key rate 300 bps

Egypt's central bank liberalized its foreign exchange market, with immediate effect, and raised its key policy rate by 300 basis points as part of a major reform program aimed at tackling persistent shortages of foreign currency and making the country's economy more internationally competitive.
In a surprise announcement, the Central Bank of Egypt (CBE) said it had set a non-binding foreign exchange rate to "serve as soft guidance to jumpstart the market," abolished its list of priority imports, will allow banks to operate until 9 p.m. every day to conduct foreign exchange transactions, and will hold multiple auctions to support the process of price formation.
Banks will be at liberty to quote and trade at any exchange rate and the central bank will use the prevailing market rate for its transactions, the CBE said.
By raising its key policy rate by 300 basis points to 14.75 percent, the CBE has now raised its rate by 550 points this year to tackle rising inflation and ensure price stability, its main objective.
"For this purpose, the CBE will closely monitor the amount of reserve money in the system and continue to rely on indirect monetary policy tools," the CBE said, adding that it will introduce deposit auctions with longer maturities at market rates.
In addition, the CBE said it had also agreed with the finance ministry to "gradually phase out the monetary financing of the budget deficit over the coming months," a move that is consistent with the government's efforts to lower the budget deficit and debt.
"The CBE will continue to monitor all economic developments and will stand ready to mobilize all tools in order to ensure price stability," the central bank said.
Egypt's inflation rate eased to 14.1 percent in September from a 2016-high of 15.5 percent in August as the government implemented reform measures, such as a cut to energy subsidies and a Value-Added-Tax (VAT).
The central bank already devalued the Egyptian pound by almost 14 percent in March to create a more favorable investment climate and attract capital flows in an effort to relieve years of foreign currency shortgage.
Today the pound was trading at 8.896 to the U.S. dollar, down only around 1 percent from around 8.8 prior to its announcement and around the level it has been trading at since March.

The Central Bank of Egypt issued the following statement:

"In its mandate, the Central Bank of Egypt (CBE) takes all necessary measures in order to
safeguard the Egyptian economy by ensuring monetary and financial stability. Accordingly,
citizen centric measures are put in place to uphold price stability over the medium term while
supporting economic development, fostering job growth, reinforcing the banking sector, and
shoring up confidence in the local economy.
As part of the comprehensive home grown reform program, backed by the support of the
international community, aimed to address the current macroeconomic and structural
imbalances that weigh on the Egyptian economy, the CBE hereby announces its decision to
move, with immediate effect, to a liberalized exchange rate regime in order to quell any
distortions in the domestic foreign currency market. This move will allow market demand and
supply dynamics to work effectively in order to create an environment of reliable and
sustainable provision of foreign currency.
To this end, the following measures have been enacted:
 The CBE has announced a nonbinding foreign exchange rate which is to serve as soft
guidance to jumpstart the market. The new regime will improve Egypt’s competiveness and
allow for the deepening of foreign currency liquidity while streamlining activity into the
formal channels. Such activity will allow for the steady accumulation of foreign currency
reserves through channels which include but are not limited to the increase of private
transfers, trade competitiveness, and foreign investments.
 The priority imports list has been abolished. Banks will be allowed to operate until 9PM every day, including Friday and Saturday, for foreign exchange transactions and transfers only. The CBE will continue to monitor market activity and hold multiple price auctions when deemed necessary. The purpose of these auctions will be to support the process of market
price formation in the early days of adjustment.

Pursuant to the above, banks and other market participants are at liberty to quote and trade at
any exchange rate. Bid and ask exchange rates will be determined by forces of demand and
supply. The CBE will use the prevailing market rate for any transactions it undertakes.During the initial period of price discovery, the forces of supply and demand will come into play,
gain traction, contest, and ultimately converge to an equilibrium. While this period will yield
some expected volatility in the short term, a liberalized exchange rate regime is the optimal and
sustainable path for the Egyptian economy. Foreign exchange shortages that hinder economic
activity will be eliminated, rendering Egypt more competitive. This will ultimately ignite demand for various Egyptian asset classes by foreign investors and contribute to Egypt’s quest of
rebuilding the foreign currency reserves.

The new exchange rate regime is a part of a broader package of reforms that will ensure
macroeconomic stability through fiscal consolidation which will be achieved by decreasing the
budget deficit and general government debt, enacting subsidy reforms, and decreasing
government spending. In order to support and ensure the viability of the program while
upholding CBE's mandates, the CBE has taken the following actions:
 The CBE key policy rates have been raised by 300 basis points, effective immediately. Deposit auctions with longer maturities with market determined rates will be introduced.
Additionally, the CBE has agreed with the Ministry of Finance to gradually phase out the
monetary financing of the budget deficit over the coming months. This objective is consistent
with the government’s commitment to prudent fiscal policies which will contribute to
decreasing the budget deficit and public debt.
Ensuring price stability over the medium term remains the main objective of the CBE. For this
purpose, the CBE will closely monitor the amount of reserve money in the system and continue
to rely on indirect monetary policy tools.

The CBE is committed to ensuring the transparency and efficiency of the local market. The CBE
will continue to monitor all economic developments and will stand ready to mobilize all tools in
order to ensure price stability. Together with the fiscal agent and the fiscal reforms already
embarked upon, the CBE is steadfastly committed to unleashing the vast potential of the
Egyptian economy, an economy that has weathered many challenges and endured much
uncertainty, an economy that will ultimately come out stronger and will persevere." www.CentralBankNews.info